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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Gary Korn who wrote (38337)	3/8/1998 12:42:00 AM
From: Jack Colton	Read Replies (1) \| Respond to of 61433

OK, I just got back from cutting and pasting. How can march have volatility of 101? Isn't that off the curve?

To: Gary Korn who wrote (38337)	3/8/1998 8:38:00 AM
From: Glenn D. Rudolph	Respond to of 61433

Implied volatility is a computed value that has to do with the option itself, rather than the underlying asset. As you know, when you compute the fair value of an option, you enter the statistical volatility of the underlying asset into an option pricing model. Often times when you do this, you will notice that the computed fair value is different than the actual market price of the option. If you were to plug in a different volatility value into the model it would change the computed fair value. Suppose you were to repeat this process, substituting volatility values until the option's fair value was equal to its actual market price. At this point, the volatility value you used to achieve this parity is known as the implied volatility. So then, implied volatility is the volatility value that makes an option's fair value equal to its actual market price. To take advantage of implied volatility, we calculate Volatility Ratios. The 20 day Volatility Ratio is calculated as: 1 Day Implied Volatility divided by 20 Day Statistical Volatility. The 90 day Volatility Ratio is calculated as: 1 Day Implied Volatility divided by 90 Day Statistical Volatility. Key Point: When the implied volatility of a stock's options stretches very far above or below the actual statistical volatility of the stock, statistical volatility acts like a rubberband, pulling the implied volatility back towards it. This also applies to indexes and commodity futures. When implied volatility stretches far above statistical volatility, the volatility ratio is high and the options are overvalued. When the implied volatility snaps back (decreases), it will drain premium out of the options (the options will lose time value). In fact, if you were to purchase options on a stock with a high volatility ratio and the implied volatility decreased, you might actually wind up losing money even if the price of the stock moved in the direction you expected! There is a name for this common situation. It is appropriately referred to as "volatility crush." You can take advantage of this situation by selling options, instead of buying options in this case. You will see how to do this in some of our Option Strategies. When implied volatility stretches far below statistical volatility, the volatility ratio is low and the options are undervalued. When the implied volatility subsequently increases, it will inflate option premiums, partially offsetting the effect of time decay. This is a good time to buy options.